case - filed ch 7 in 2011 , discharged in May 11 , case closed in Jan 12' . Filing included cc debts , first mortgage and mortgage on rental property . Properties were all under water . Now we're doing our 2012 return , my CPA says that I have to reduce the cost basis on the rental by the amount discharged . IF I were to sell that house any $ from that is considered a GAIN and I have to pay taxes on it . What ? I know I am personally cleared of all debts II . The bank has a lien on the house and any sale of that that the bank would get the proceeds to cover the loan balance . Why would my CPA suggest that I get the sale proceeds and must PAY taxes on the sale ( gain ) ? I can understand if it sold for more than the loan balance and that amount i pay taxes . It doesn't make sense . HELP !
Unfortunately, your accountant is correct; however, since you had debt discharged in bankruptcy, the amount by which the basis of your property must be reduced will depend on how much debt you still have after the bankruptcy discharge and the total bases of all property you still have, plus any cash on hand.
In your case, because the rental property is still subject to the mortgage debt, that debt should be included in determining whether the aggregate bases of your property exceeds your total remaining debt. Unfortunately, however, it's impossible to give you a quantitative answer without knowing all of the facts and circumstances of your case. You should speak in more detail with your accountant and make sure you understand exactly how much he thinks the basis must be reduced, and why.
My answer does not constitute legal advice and may not be relied upon by anyone for any purpose and does not constitute an attorney/client relationship or an offer to form such a relationship. This disclaimer is intended to be fully compliant with the requirements of Treasury Department Circular 230 and the terms thereof are fully incorporated by reference. If you wish to consult with me please contact me at dana@nytaxcounsel or visit my website at www.nytaxcounsel.com
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Family Law Attorney
In most circumstances, forgiveness of any portion (or all) of a loan is considered taxable. It seems that your CPA gave good advice.
The above is not intended to be legal advice, but may be used for general information. Please contact an attorney for specific help tailored to your needs. www.figgardenlaw.com
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I suspect you might have been depreciating the property over the years which adjusts your basis downward.
If you sell the house for more than the basis (or adjusted basis) that is gain regardless if you actually net any proceeds.
For example, investor buys a property for 200,000, takes out a $175,000 interest only mortgage, and owns it for 7 years. Each year, the investor claims $12,000 in depreciation on his taxes. The investor goes to sell the property (capitulates due to real estate crisis), short sells it, and only gets $150,000. However, the adjusted basis of the property is $104,000 ((12,000 x 8) - 200,000)). So, this investor has a realized, taxable, gain of $46,000 even though the investor is not pocketing any money.
Also, the bankruptcy has nothing to do with this issue. The issue is straightforward capital gains tax. If you have gain, it is taxable; so you must find either an exception or other losses to offset.
The CPA does seem to know what he or she is doing...sorry.
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